Its is all about Stop Loss

Its Self explanatory, this is an act of stopping further loss to a Stock Trader.
Say Mr.X purchases the Stock at Rs.100 expecting price to increases by Rs.20. So his target is Rs. 120 (100+20), meanwhile he should be prepared for the Downside risk of the particular stock. Hence he has planned to take a risk of Rs.10, and then he should exit (Sell) his position at Rs.90 (100-10).

In the above Scenario:
Traders Position is Long, Entry Level is Rs.100, Target is Rs.120 and Stop Loss is Rs.90

Here Any Price fall below 90 would not affect the trader as he prepared (placed Stop Loss order) to exit his long position.

1. It protects the unnecessary downside risk of the trader.
2. Trader can be prepared for both favorable and unfavorable Exit

1. Novice traders are not ready to exit the stock at loss, it is nothing but they don’t accept the failures. Instead they hope the price to reverse which may or may not happen.
2. Sometimes, we place stop loss which gets triggered due to the volatile scenario and the price turns immediately to our expected direction. This hurts trader emotionally, so instead of optimizing the stop loss level, they ignore stop loss orders

Stoploss is a level by which we exit our trade positions; it is our Plan B Exit.  So it is a level where we mitigate our original view.

Fundamental Stock Views: These traders are generally place the Protective stoploss (on Percentage terms) to protect their capital. Some time their exits are not based on price action, rather it is decided on change in company fundamentals.

Technical Stock View:  The Position are considered based on Demand and Supply equations, Long positions are created only when the Demand is Greater than Supply. Having created a long position, if price goes down we can consider holding the same as long as it trades above support level (Buying Interest). And there is no point in holding this stock if price fall below the Support level.

Say a Stock Trading at Rs. 100 and a trader purchases the stock at current levels with the price target of Rs.120 and Stop loss of Rs.90.

To Purchase a Stock: Place Buy Order with the Limit Price of Rs.100 (this will be executed immediately)

To Fix Target: Place Sell order at Rs.120 (this will be pending as the current price is Rs.100 only)

To Set Stop loss : Place Stop loss Sell Order.. Why?

Here we are planning to exit the long position, then it should be Sell order, but it is not a Normal Sell order, as it will be executed immediately at Rs.100, instead of waiting till 90. Hence we have to Choose Stoploss Order then it may ask us to place triggering price at which the order will be considered for trading.

Stop loss order Parameters:

Triggering Price– This is the level we are considered as stop loss

Limit Price – The Max limit till my trades can be considered

Hence The Stop loss Sell ordered Triggering price is Rs.90 and the Limit price can be Less than or equal to Rs.90

Stop loss are placed by understanding the three major parameters.

1. Directional View – (Based on Technical -Support and Resistance level or Fundamental)
2. Stock Volatility – (Based on Average stock Movement)
3. Traders Risk Appetite – (Based on ability/willingness of the traders loss limit)

Generally Stop losses are derived by considered the above factors.

If we expect the Trend is very strong and price is hovering at its early stage meanwhile the volatility is quite high due to market/global News, then the wider stop loss can be considered.

Note: If the Expected return in such scenario is lesser than the wider level stop loss risk, then the complete trade can be ignored.

Tight Stoploss does not mean the random number nearer to the entry price; rather it is the very recent support or resistance levels.

This type of stop loss is placed during when the stop move very quickly or the movement is driven by stock specific events or due to unwinding of positions.

Note: The Tight Stoploss are place strictly by considering (Technical level and Average volatility)

This is widely used by traders who want to ride the most of the trend.

Say a Stock is trading at Rs.100 expected to rally but no immediate resistance seen, hence the trader can set a initial stop loss, later as the price enters into the next zone, he can consider revising the stop loss upward by considering the (Technical levels and Average volatility).

After a significant rally, depends on technical level, the stop loss with the placed tightly

Note: It is recommended not to consider the percentage basis trial as it may not have sound login while it get triggered.